Institutional Investors and Stock Market Volatility

Paper: SSRN 837165

Abstract

We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 4.0/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a theoretical model using power-law distributions and optimal trading behavior derived via analytical methods, indicating high math complexity. While it references empirical stylized facts, the excerpt lacks specific data sources, code, or backtesting details, leaning more towards theoretical derivation than empirical implementation.

Research Flowchart

  flowchart TD
  A["Research Question: What causes excess stock market volatility?"]
  B["Methodology: Theoretical Model & Empirical Analysis"]
  C["Data: Institutional Trades & Stock Liquidity"]
  D["Process: Analyze trade impact on price deviations"]
  E["Key Finding: Large institutional trades drive volatility in illiquid markets"]
  
  A --> B
  B --> C
  C --> D
  D --> E